Porter Stansberry – WNDhttp://www.wnd.com
A Free Press For A Free People Since 1997Fri, 18 Aug 2017 03:17:54 +0000en-UShourly1https://wordpress.org/?v=4.63 ways to get America back on trackhttp://www.wnd.com/2013/11/three-ways-to-get-america-back-on-track/
http://www.wnd.com/2013/11/three-ways-to-get-america-back-on-track/#respondSat, 09 Nov 2013 23:40:28 +0000http://wp.wnd.com/?p=561239The United States is still – by a wide margin – the wealthiest and most powerful nation in the world.

We have a greater productive capacity than any other nation. It’s probably larger than all of Europe combined.

And despite what many people believe, I don’t think our country’s best days are behind us.

That may sound funny coming from the person who predicted the “End of America.” But my thesis is about the end of the dollar’s status as the world’s reserve currency and the devastating economic crisis that would follow. But America has recovered from crises before (and usually emerges stronger). I’ve always said I thought our political union would survive.

I’m still an optimist. I think that sooner or later – and I can’t say when – the madness of our current economic policies will be so evident that this country will make wholesale changes. I just don’t believe we’ll vote ourselves down the abyss.

Eventually, the middle class will realize this idea that we can tax, borrow and spend our way to prosperity is failing. By then, real wages will have fallen so far, the wealth gap will have become so pronounced, the collusion between government and the banks will have become so evident that people will vote in a candidate willing to take some radical steps to get us on the right track. Somebody like a Ron Paul, for example.

And you would be amazed how quickly even the huge hurdles we’re setting for ourselves could be overcome with just some sensible policies. For instance:

Sensible Policy No. 1: Imagine what would happen if we just had a flat income tax rate for everybody. We’d abolish every other tax – corporate taxes, social security taxes, payroll taxes and every other federal tax, levy, fine and fee.

Instead, you’d just pay 20 percent of your income, whatever the source. We’d get rid of the different tax structures for different corporate entities and the different shelters and rebates. Wherever your source of income – dividends, capital gains, wages, etc. – we all pay the same flat rate.

So the first thing we need to do to get our country back on track is to have a fair, sensible income-tax policy, period.

Sensible Policy No. 2: We need to pass a balanced budget amendment that keeps us from financing foreign wars and an endless welfare state.

We need true welfare reform, not the kind you saw in 1996 where everyone just jumped from welfare to disability.

If you have some kind of an emergency situation, you can apply to the federal government for help up to a limit of $5,000 over six weeks (to pick arbitrary terms). And that’s it. You won’t get any money from the government again.

Sensible Policy No. 3: We need to get out of the business of trying to regulate every single banking transaction in the world.

In the financial crisis, who got into trouble? Was it the hedge funds that are unregulated and backed with private capital? No. It was the banks that are heavily regulated and backed with public capital.

To ensure everyone’s money is safe, we’d back the currency by gold. We’d put up 20 percent of every dollar in existence in gold.

We need to stop trying to regulate the banks and guaranteeing the deposits. Leave that up to the market. But guess what? You won’t even have to put your money in a bank if it’s backed by gold. All you’d have to do is put it under the mattress and you’ll be fine.

With those three steps, we’d have a fair and transparent tax policy, we’d have a sensible federal budget with no budget deficit, and we’d be out of the business of trying to control every dollar that’s spent and the way it’s banked around the world.

If we did just those three things, the size of our economy could double in five years.

It would be an unbelievable boom because America is still the largest market in the world. We still control the global language of business. We still have the best computing and software companies, the best technology. We have unlimited amounts of energy (thanks to the shale oil and gas boom), despite what the politicians and bureaucrats in government tell you.

But as long as we continue with the idiotic socialist policies we’re currently pursuing, we are going to bankrupt ourselves just like every other socialist nation, no matter how wealthy and powerful we are.

]]>http://www.wnd.com/2013/11/three-ways-to-get-america-back-on-track/feed/0I know exactly what the Fed's next move will behttp://www.wnd.com/2013/10/i-know-exactly-what-the-feds-next-move-will-be/
http://www.wnd.com/2013/10/i-know-exactly-what-the-feds-next-move-will-be/#respondTue, 29 Oct 2013 00:56:27 +0000http://wp.wnd.com/?p=554865For rich people all around the world, Ben Bernanke has been a living saint.

As I explained recently, the Federal Reserve chairman’s policies have allowed the world’s wealthiest capitalists to borrow unprecedented amounts of money … and buy world-class assets.

Meanwhile, the people whom Ben fleeced – the workers, the savers, the few Americans left with simple industry and thrift, the kind of folks who would never have believed the government would actively try to hurt them – have been wiped out. They’ve seen the real value of their wages, savings and standard of living decline by huge amounts.

If you doubt me, consider the following graphic of indicators. They are real and “unadjusted” (unlike the U.S. government’s various measures of inflation, which have “adjusted” so many times over the years that they’re nearly meaningless).

Most of our indicators are self-explanatory. They show how much the price of some basic goods have risen since Bernanke took over as Fed chairman. For comparison, we’ve also included how much the U.S. government’s total obligations (“Fed Debt”) have swollen. And we’ve included the increase in the Federal Reserve’s balance sheet – our economy’s monetary base.

It’s clear: As the number of dollars increased, each one bought less and less.

And as you can see from the next graphic, our assets are worth less, too.

The “S&P in Gold” is the change in the value of one share of the S&P 500, if you measured the stock index in gold ounces rather than dollars. We believe this is a better measure of the actual value of U.S. corporate assets because it measures their value in a sound currency (gold) rather than in paper.

And we included the share price of Citigroup. As head of the Federal Reserve, Bernanke’s primary regulatory duty was to police the large banks and to protect their depositors. We think the near total destruction in equity value of what was the largest U.S. bank when he took over at the Fed speaks volumes about how well Bernanke did his job.

Bernanke gutted the dollar. He gutted the middle class. He gutted the savings of millions. And he greatly impoverished our country.

And yet, despite it all, Ben Bernanke is still being proclaimed a hero of the republic.

“When faced with potential global economic meltdown, he has displayed tremendous courage and creativity,” said President Obama at a recent White House news conference. “He took bold action that was needed to avert another Depression.”

USA Today added: “Bernanke, a shy and self-effacing former Princeton professor, boldly led the U.S. economy through the worst financial crisis since the Great Depression.”

And because there’s nothing genuinely good to say about the guy, as is typical with worthless government officials leaving the scene, the plaudits quickly spill over into maudlin absurdity: “Guiding the economy was like brain surgery, and you needed an expert to do it,” claimed Michael Gertler, a New York University professor of economics.

We know what to expect from the Federal Reserve. Its policies will continue to support and promote the incredible profligacy of our country’s government. These policies will, in the end, cause unbelievable harm to millions of Americans. They will devastate the average standard of living in our country and leave a great many people in abject poverty.

]]>http://www.wnd.com/2013/10/i-know-exactly-what-the-feds-next-move-will-be/feed/0Why you'll soon be paying rent to the Chinesehttp://www.wnd.com/2013/10/why-youll-soon-be-paying-rent-to-the-chinese/
http://www.wnd.com/2013/10/why-youll-soon-be-paying-rent-to-the-chinese/#respondFri, 04 Oct 2013 01:06:16 +0000http://wp.wnd.com/?p=537299Today, I want to talk about something easy and basic, something that every American should understand.

When you borrow money, you eventually have to pay it back – plus interest.

That’s all you need to know to understand the financial crisis and the terrible consequences we face if we don’t stop borrowing money from foreign creditors.

Before the financial crisis of 2008/2009, America was caught up in a huge debt-financed spending boom. Our trade deficits were soaring out of control simply because we continued to consume more than we produced. The debt to finance this consumption piled up in the form of mortgages and the federal deficit. It enabled the housing boom, which in turn created the structured-finance debacle that wrecked AIG and wiped out Bear Stearns and Lehman Brothers.

What fewer people realize about the boom and bust is that foreigners continued to pile up more and more U.S. assets. In a short period of time, foreigners received $2.5 trillion worth of net U.S. assets.

The following chart, made with data from the St. Louis branch of the Federal Reserve, shows the current account balance from 1980 through 2006. As you can see, the balance of trade and finance between America and the rest of the world got completely out of whack beginning in the mid-1990s and accelerating into the 2000s. This occurred because Americans began to consume far more than they produced, financing the deficit using the cheap credit enabled by the dollar’s world reserve currency status.

No less a person than legendary investor Warren Buffett warned in 2003 that our national preference for consumption rather than thrift would eventually ruin our currency and spark a financial crisis. He was particularly worried that we were now borrowing and spending so much that we had become dependent on foreign creditors. He described the situation in an article he wrote for Fortune magazine reducing the problem to “Squanderville vs. Thriftville.”

Buffett warned that we would inevitably grow poorer relative to the rest of the world and our creditors would grow wealthier. As he wrote:

I’m about to deliver a warning. … Our country’s net worth is now being transferred abroad at an alarming rate. A perpetuation of this transfer will lead to major trouble.

And so it did. We borrowed so much money that during 2004, 2005 and 2006, finance companies earned more than 40 percent of all the profits in the S&P 500! When 40 percent of all the profits in our economy relate to finance charges, we have a society that has gone mad. We turned our country into a kind of giant ATM, dispensing the savings of foreign investors.

It was this borrowing and spending, this constant consumption far, far above our ability to produce, that was the root cause of our financial problems. There is no other, more basic and accurate way to understand the real fundamentals of what happened. Buffett explained in his Fortune piece what was happening:

In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume four percent more than we produce – that’s the trade deficit – we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.

Plenty of people (especially U.S. politicians) constantly say these deficits don’t matter, that we owe it to “ourselves.” That’s simply not true, as Buffett pointed out 10 years ago: “The rest of the world owns a staggering $2.5 trillion more of the U.S. than we own of other countries. … To put the $2.5 trillion of net foreign ownership in perspective, contrast it with the $12 trillion value of publicly owned U.S. stocks.”

“As foreign ownership grows, so will the annual net investment income flowing out of this country,” Buffett explained. “That will leave us paying ever-increasing dividends and interest to the world rather than being a net receiver of them, as in the past. We have entered the world of negative compounding – goodbye pleasure, hello pain.”

Now, I’m going to give you some data points below. But you don’t really need any facts to answer the following key questions:

Over the last five years, has anything material changed about the way of life and the nature of our economy in the United States?

Have we begun to actually produce more than we consume? Have we stopped being a society obsessed with consumption? Have we stopped the madness of our debt-fueled spending binge? Have we learned anything from the crisis and changed our financial, cultural or moral excesses?

A few facts: Since the fourth quarter of 2009, the U.S. current account deficit has been more than $100 billion per quarter. As a result, foreigners now own $4.2 trillion more U.S. investment assets than we own abroad. That’s $1.7 trillion more than when Buffett first warned about this huge problem in 2003. Said another way, the problem is 68 percent bigger now.

And here’s a number no one else will tell you – not even Buffett. Foreigners now own $25 trillion in U.S. assets. And yet, we continue to consume far more than we produce, and we borrow massively to finance our deficits.

Since 2007, the total government debt in the U.S. (federal, state and local) has doubled from around $10 trillion to $20 trillion.

Meanwhile, the size of Fannie and Freddie’s mortgage book declined slightly since 2007, falling from $4.9 trillion to $4.6 trillion. That’s some good news, right?

Nope. The excesses just moved to a new agency. The “other” federal mortgage bank, the Federal Housing Administration, now is originating 20 percent of all mortgages in the U.S., up from less than 5 percent in 2007.

Student debt, also spurred on by government guarantees, has also boomed, doubling since 2007 to more than $1 trillion. Altogether, total debt in our economy has grown from around $50 trillion to more than $60 trillion since 2007.

Perhaps we could afford these obligations if our productive capacity was also expanding rapidly. But it’s not. Since 2007, production on a per-capita basis has declined. Real, per-capital GDP in the U.S. at the end of 2007 was $43,635.59. As of the end of 2012, it was $43,063.36.

One big reason productivity is falling: More Americans than ever aren’t working. Today, more than 90 million Americans are not in the labor force. That’s 13 percent more people not working than in 2007.

Who is working? The government, which doesn’t produce anything. We estimate total employment in the federal government has increased by nearly 400,000 since 2007 – or roughly 10 percent. Officially, the new hires number is 276,000, but we know that between 100,000 and 200,000 NSA/CIA contractors are not being counted.

What are all of these government employees doing to serve us? Many are writing new rules for us to follow. There were 22,771 pages of federal rules and regulations in 2007. Today, there are 27,274 pages of rules for you to follow – 20 percent more rules in only six years. And how will these new employees and new rules help us solve our core spending problem? My bet is they won’t.

Nothing has changed whatsoever about the root cause of the financial crisis. We still have massive amounts of debt, far too much to safely finance. We still continue to borrow larger and larger amounts, as if nothing at all went wrong. So today, once again, financial firms’ profits make up a huge, disproportionate amount of the total profits of the S&P 500 (20 percent).

And it’s not just us. In the European monetary union, government debts totaled 66 percent of GDP in 2007. Today, they’re more than 90 percent. In the United Kingdom, government debt equaled 43 percent of the economy in 2007. Today, it’s also at 90 percent. Unbelievably, no one in the developed world seems to be able to generate wealth anymore – only more debts.

To finance these debts, we continue to sell parts of our “farm” to foreigners. By doing so, we will become much poorer over time. Ten years ago, the combined economies of Brazil, Russia, India and China (the so-called “BRIC” nations) equaled roughly 29 percent of our economy. By 2007, their economies were equal to 53 percent of ours. Today, they equal 91 percent! Our borrowing is fueling their boom. Buffett warned this would happen, as well as what would happen after we racked up all of these debts:

Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies – that is, issue more Squanderbucks to dilute the value of each. … That prospect is why I, were I a resident of Thriftville, would opt for direct ownership of Squanderville land rather than bonds of the island’s government. Most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold. Theft by stealth is preferred to theft by force.

Buffett was right again. In 2009, the Federal Reserve began to massively monetize the U.S. debt, allowing the U.S. Treasury to issue more debt and repay existing debt by simply selling it to the Federal Reserve (which creates the funding for such purchases by printing the money). The Fed has since printed up about $3.5 trillion. And recently, it promised to keep doing so. As a result, since 2007, M2 – a basic measure of money in the U.S. economy – has increased by 38 percent.

And so, what are our foreign masters doing? They’re dumping Treasurys and buying U.S. assets. Chinese firms now own IBM’s personal computer division, the AMC movie-theater chain, pork producer Smithfield, plus some of our most valuable new sources of energy, via equity deals with Devon Energy and Chesapeake Energy. So far in 2013 alone, China has spent $10 billion on U.S. assets, compared with less than $1 billion in 2008.

Our foreign masters will soon begin buying massive amounts of U.S. property, as they move their holdings from the obligations of Freddie and Fannie into the underlying assets. In 2012, the Chinese bought $3 billion of commercial real estate in California. Soon, I believe, they’ll begin buying huge packages of U.S. residential houses. Thus, in three or four years, millions of Americans will literally be paying rent to the Chinese. It will absolutely happen.

The next time you think about saying you’re grateful to the Fed and to Obama for “bailing out” the U.S. economy, I hope you’ll think again. All they’ve really done is push the inevitable collapse of our economy further into the future, by selling off our country’s greatest assets to our chief economic rivals. This, my friends, is truly the worst possible outcome. Just imagine what country we’ll have left in another 20 years.

Regular readers know where I believe this will end:Our foreign creditors will lose faith in our ability to repay these enormous debts. They will dump their dollar holdings. And America will lose its coveted reserve currency status. The dollar will lose more than half its value – probably all of it.

Although the forces that cause huge currency movements will end up bankrupting the majority of Americans, most people don’t even know they exist. You won’t learn about them from your parents. You won’t learn about them from your friends. Even business classes at top universities are largely useless for learning about these forces.

This is an enormous problem, one that could have catastrophic consequences for your wellbeing. As the U.S. government’s reckless monetary policies drive us toward financial ruin, knowing about these hidden forces could mean the difference between bankrupting your family or safely making a fortune.

Special offer from Porter Stansberry:One of my partners at Stansberry & Associates, Dr. Steve Sjuggerud, has studied and written about currencies for nearly 20 years. At my request, he’s written a “seminar” detailing how these forces work and their impact on every American. He also reveals several unique trades that will allow you to safely build a huge amount of wealth in the midst of currency fluctuations, including what he’s calling “the greatest currency trade of the next 10 years.” Steve’s new report will provide you with all of the education you need to navigate this market. Reading it will take you less than 30 minutes. At the end, you’ll know more than most bankers and MBAs. Take us up on our 100 percent money-back guarantee and try True Wealth for four months. Read through Steve’s report a few times. If you don’t think it’s the most comprehensive and well-written report on how to protect yourself and your family from the coming destruction of the U.S. dollar, we’ll refund every penny. You can sign up for True Wealth and the special report right here.

]]>http://www.wnd.com/2013/10/why-youll-soon-be-paying-rent-to-the-chinese/feed/0No secret to investment success … except this onehttp://www.wnd.com/2013/09/no-secret-to-investment-success-except-this-one/
http://www.wnd.com/2013/09/no-secret-to-investment-success-except-this-one/#respondThu, 26 Sep 2013 01:35:50 +0000http://wp.wnd.com/?p=530269Last week, I shared a private conversation I had with a wealthy friend of mine.

My friend is the CEO of a major global business. Several years ago, he asked me to help him with his personal portfolio.

“There’s no secret to investment success,” I told him. “As the leader of a big global business, you’ve done dozens of very successful acquisitions. You know exactly what creates business success. And you know the appropriate price to pay for private companies. Just apply the exact same care to your personal investment decisions.”

Today, I’d like to share the numbers that prove just how important business judgment can be to investors. I’ll also show you where to find the world’s greatest businesses today.

Assume that you had perfect business judgment 20 years ago. You could tell, just looking at various public companies, which ones had “the right stuff.” You decided to invest $100 each in 10 stocks. You picked your 10 investments by figuring out which companies would increase their per-share book value the most over the next 20 years.

Knowing the companies would thrive, you assumed stock prices would eventually follow.

If you’d done that, your $1,000 portfolio of 10 stocks would now be worth $74,283.60. That’s an annualized return of a little more than 24 percent – about three times better than the market in general over that time.

Obviously, no one can possibly predict which 10 S&P 500 companies will produce the highest per-share book value gains over 20 years. But …

Gauging the qualities that make for a successful business is vastly easier and far more certain than trying to predict future investment performance any other way.

Interestingly, my hypothetical 24 percent a year, which assumed perfect knowledge, isn’t that much different than Warren Buffett’s actual record at his holding company, Berkshire Hathaway, where he has averaged about 19 percent a year over the length of his career.

His approach is based entirely on business judgment and paying a fair price.

Likewise, I believe my biggest advantage as a stock-picker is simply that I’ve owned and operated a successful publishing company for almost 15 years. I know from my own experiences in business the factors that really matter and allow a business to grow. I look for these same factors in the stocks I recommend.

But what if you’ve never owned a business? What if you’ve never been a part of a senior management team? Is there any other way to begin to acquire some of the same insights into how businesses really work and the factors that tend to matter the most over the long term?

If I wanted to learn a lot about how businesses work best, I’d study the businesses that have been most successful in the past. I’d think about what allowed them to increase their value so rapidly over a long period. I’d try to figure out which companies today have those same qualities.

Looking at today’s S&P 500, the companies that increased their per-share book values the most over the past 20 years (1992-2012) were:

Chesapeake Energy

Express Scripts

Kohl’s

Qualcomm

Intuit

Cisco Systems

Bed Bath & Beyond

Oracle

Urban Outfitters

EMC Corp.

You can break down these companies into one of three large baskets of superior performance.

The first category is technological innovation. Qualcomm, Intuit, Cisco, Oracle and EMC all participated in the dominant technological trend of the past two decades – the Internet. By creating the proprietary software, hardware and wireless-networking technology that created the Internet and just about every other Internet-based business, these companies were able to achieve extraordinary profit margins and huge returns on equity.

This trend, by the way, continues today. More powerful extensions of the Internet are constantly being created, like “cloud”-based services, massively multiplayer online games, social networks, payment systems and communication tools, like Skype.

Can you find any leading businesses in these sectors, whose innovations have created huge operating margins and whose shares are trading at a fair price? Hint: We recently recommended one in my newsletter. It’s currently trading at less than 10 times cash flow. It has an operating margin in excess of 35 percent, and it’s earning more than $1 billion a year on tangible equity of less than $2.5 billion. This is a great business, trading at a fair price. (Note: We currently rate the shares a “hold” simply because of our concerns about the overall market, but we’re probably being too cautious.)

I’d call the second obvious category merchandizing:Express Scripts, Kohl’s, Bed Bath & Beyond, and Urban Outfitters. Buffett owns a lot of retail stores for a reason. These are great businesses – if they have merchandise people love.

Kohl’s’ formula has been to get exclusive rights to certain merchandise – like Vera Wang (according to my wife) – which helps protect it from competition. That’s what creates a double-digit operating margin and 15 percent annual return on equity. Even minor amounts of growth from new stores will create a lot of wealth.

I have to admit that the results at the other big retailers on my list are simply a mystery to me. I don’t know how they do it. I was shocked to see a nearly 20 percent return on equity at Urban Outfitters and a 26 percent return on equity at Bed Bath & Beyond.

These companies have figured out how to merchandize expertly, then paired that skill with great financial management – especially at Bed Bath & Beyond. This company’s results are simply amazing. It has no debt and continues to buy back mountains of stock (about $2 billion in the last three years). Today, you can buy the stock for only 12 times earnings.

Finally, there’s Chesapeake Energy. I’d call the secret to that company’s long-term success simply “discovery.” It found tremendous amounts of natural gas in the United States over the last 20 years by looking in places (shale formations) that everyone else thought would never produce.

Plenty of companies are doing the same right now with oil all over Texas’ Permian Basin, where the oil shale is much thicker than in other regions, like the Bakken in the Northern Plains or Texas’ Eagle Ford. Look for companies like Laredo Petroleum (LPI), Devon Energy (DVN) and Concho Resources (CXO) to produce similar long-term results because of massive new discoveries.

I hope you’ve learned more about what makes for a great business over the long term. Work on learning more about these kinds of businesses – innovation, retail and discovery – to continue to grow as an investor.

P.S. Despite my general concerns that we face a severe market correction in the near future, I continue to believe that holding the stocks of a few elite businesses is critical to weathering the turbulent economy I predict. And in my Investment Advisory, we keep a portfolio of stocks in what I call “the world’s best business.” To learn more about my advisory and how to access all my research on these stocks, click here.

]]>http://www.wnd.com/2013/09/no-secret-to-investment-success-except-this-one/feed/0A private letter from Warren Buffetthttp://www.wnd.com/2013/09/a-private-letter-from-warren-buffett/
http://www.wnd.com/2013/09/a-private-letter-from-warren-buffett/#respondThu, 19 Sep 2013 01:44:33 +0000http://wp.wnd.com/?p=525925Today, we will break confidences in a way. I will tell you about a private discussion I had with a very wealthy man who, perhaps like you, has long struggled with his personal portfolio. He now faces even tougher decisions about how to allocate capital for his business.

Out of all the things I’ve written about over the years, I think you’ll find this discussion might hold the greatest value – if, that is, you’re willing to think carefully about this private discussion.

The message at the heart of today’s essay addresses the very foundation of successful investing. In my experience, the ability to comprehend and internalize the ideas below will be limited to people who have owned or operated their own business. Very few others have grasped their significance.

I hope you will be among the few who do.

I believe understanding – from the beginning – that the strategy we’re discussing below is most suitable for business owners may, in fact, be the key to understanding it for everyone.
The story starts this way:

Several years ago, a close friend, who is the CEO of a major global business, asked me to help him with his personal portfolio. Normally, I’d never even agree to a meeting where I thought the subject would come up. Most people assume, wrongly, that I know something more about securities or investment opportunities that I don’t include in my newsletter. But I don’t. I write up all of the best ideas I discover.

And that is exactly what I told my friend. Besides, I knew he really didn’t need my newsletter.

“There’s no secret to investment success,” I told him. “As the leader of a big, global business, you’ve done dozens of very successful acquisitions. You know exactly what creates business success. And you know the appropriate price to pay for private companies. Just apply the exact same care to your personal investment decisions.”

Two weeks ago, I saw my friend for the first time in a long while. We were talking about investments again. But this time, we were talking about how he manages his company’s tremendous cash flows. He explained that he’d hired a “professional” money-management group.

I asked the logical question: “How’s that working for you?” But I knew the answer before I asked – “Terribly.”

My friend believes that investment professionals – who do not have day-to-day responsibility for operating a business – will prove to have better business judgment than a long-term CEO who has successfully managed dozens of acquisitions and grown his business from $75 million in market cap to more than $1 billion.

My friend has world-class business judgment. He developed it by making decisions every day about marketing, product development, personnel, policies, branding, real estate, partnerships, lawsuits, and insurance – decisions with millions of dollars at stake.

To believe that a money manager, whose chief source of business insight is probably Barron’s magazine, is going to prove more successful as an investor is like believing the local putt-putt champion will beat Tiger Woods in a driving contest.

Yes, I know: A select few money managers have outstanding, world-class business judgment – like Carl Icahn, for example. But you can count these money managers on two hands. And investing with them is extremely expensive.

In other words, whether my friend likes it or not, he’s likely to be far better off managing his company’s excess capital personally than he is entrusting it to a “professional.”

The same is likely true for you, if you have any significant business experience. That experience is your greatest advantage in the markets.

In the mid-1970s, an investor with tremendous business experience, Warren Buffett, became the business “coach” and confidant of the Washington Post’s Katharine Graham. Graham became chairman and CEO of the newspaper company unexpectedly when her husband committed suicide. She leaned heavily on Buffett’s business judgment – especially when it came to the question of how to manage the business fund. Buffett addressed that critical question in a private letter to Graham.

Fortunately, I was sent a copy of that letter late last month. Here’s what Buffett told one of his closest friends about how to manage her company’s pension account:

The directors and officers of the company consider themselves to be quite capable of making business decisions, including decisions regarding the long-term attractiveness of specific business operations purchased at specific prices. We have made decisions to purchase several television businesses, a newspaper business, etc. And in other relationships, we have made such judgments covering a much wider spectrum of business operations.

Negotiated prices for such purchases of entire businesses often are dramatically higher than stock market valuations attributable to well-managed similar operations. Longer term, rewards to owners in both cases will flow from such investments proportional to the economic results of the business. By buying small pieces of businesses through the stock market rather than entire businesses through negotiation, several disadvantages occur: a) the right to manage, or select managers, is forfeited; b) the right to determine dividend policy or direct the areas of internal reinvestment is absent; c) ability to borrow long-term against the business assets (versus against the stock position) is greatly reduced; and d) the opportunity to sell the businesses on a full-value, private-owner basis is forfeited.

[These disadvantages are offset by] the periodic tendency of stock markets to experience excesses, which cause businesses – when changing hands in small pieces through stock transactions – to sell at prices significantly above privately determined negotiated values. At such times, holdings may be liquidated at better prices than if the whole business were owned – and, due to the impersonal nature of securities markets, no moral stigma need be attached to dealing with such unwitting buyers.

Stock market prices may bounce wildly and irrationally, but if decisions regarding internal rates of return of the business are reasonably correct – and a small portion of the business is bought at a fraction of its private-owner value – a good return for the fund should be assured over the time span against which pension fund results should be measured.

[Success] in large part, is a matter of attitude, whereby the results of the business become the standard against which measurements are made rather than quarterly stock prices. It embodies a long time span for judgment confirmation, just as does an investment by a corporation in a major new division, plant, or product. It treats stock ownership as business ownership with corresponding adjustment in mental set. And it demands an excess of value of price paid, not merely a favorable short-term earnings or stock market outlook. General stock market considerations simply don’t enter into the purchase decisions.

Finally, [success] rests on a belief, which both seems logical and which has been borne out historically in securities markets, that intrinsic value is the eventual prime determinant of stock prices. In the words of my former boss: ‘In the short run the market is a voting machine, but in the long run it is a weighing machine.’

This approach – to buy individual stocks in the same way you’d buy whole business operations and to ignore whatever sentiment is prevalent in the stock market – turns out to be both the most profitable way to invest (because of the focus on long-term results and appropriate purchase price) and the safest.

Use your hard-won business judgment. Don’t buy a single share of stock in any company you wouldn’t want to own forever. Don’t judge the investment’s success or failure by its share price, but instead by its business results. Don’t allow popular sentiment to sway you from your course. Instead, use the wild, irrational swings in average share prices to give you opportunities to both buy at great discounts and sell at unwarranted premiums.

As Buffett himself says, thanks to the impersonal nature of the market, you can take advantage of “unwitting buyers” without any stigma.

Few business people invest in the stock market as they would in their own industry. It’s easier to simply wire the money somewhere else – and make it someone else’s problem. But if you’re an experienced business person, you’re not likely to solve your investment challenge by going to “professional” investors. Your business judgment will almost surely be more sophisticated than theirs.

]]>http://www.wnd.com/2013/09/a-private-letter-from-warren-buffett/feed/0Federal government twice as bankrupt as Detroithttp://www.wnd.com/2013/08/dederal-government-twice-as-bankrupt-as-detroit/
http://www.wnd.com/2013/08/dederal-government-twice-as-bankrupt-as-detroit/#respondFri, 09 Aug 2013 00:36:03 +0000http://wp.wnd.com/?p=495797Detroit declared bankruptcy a few days ago.

I’ve written for years about how Detroit should serve as a stark warning to Americans who believe in liberal social policies, like highly progressive taxes and expensive social safety nets.

These socialist programs don’t cure income inequality. They merely destroy wealth by reducing incentives for building businesses and encouraging dependency. That’s why societies with lots of government spending typically have few civil institutions and a small middle class.

Here’s the message our politicians on both sides of the aisle seem to miss: Fifty years ago, Detroit was one of the largest and wealthiest cities in the world. Nearly 2 million people lived there, and it enjoyed the highest per-capita income in the United States.

Then, in 1960, everything changed.

Liberal Democrats came to power (and have held power since). Their ideas about using the government to build a “Great Society” – using the government to provide a cradle-to-grave social safety net – have slowly transformed Detroit from the wealthiest city in America to a hellhole.

Detroit’s population has declined by almost 70 percent since 1960. Roughly half of the people who remain are functionally illiterate. More than 60 percent live below the poverty line. And roughly half of all adults don’t work. Only about one-third of the city’s ambulances are in working order. Almost half of the streetlights don’t work. It takes the police an average of 58 minutes to respond to emergency calls. The violent crime rate (no surprise) is five times higher than the national average.

It is shocking to realize that only 50 years ago, Detroit was the shining example for the world of capitalism and civil society. It doesn’t take long to destroy wealth.

Now consider this: Detroit went bankrupt with total debts of around $20 billion. That’s roughly $28,000 per remaining citizen. That’s nothing. The debts the U.S. government has amassed over the same period (the last 50 years) are vastly larger.

Today, all Americans owe more than $16.7 trillion on the federal level – that’s nearly $54,000 per citizen and nearly $150,000 per taxpayer. How many Americans do you think realize that our federal government is twice as bankrupt as Detroit?

Detroit is a living case study of why government efforts to redistribute wealth don’t work. But instead of recognizing any of the lessons of the catastrophe, Obama promises more of the same policies!

Meanwhile, his government is in far worse shape than the city. The only real difference is the president and the federal government are still able to print their way out of trouble, using the Federal Reserve’s ongoing manipulation of the U.S. Treasury market.

But no nation in history became wealthier by printing money and buying its own government’s debts. In every case, inflation soon destroyed the economies and wiped out private savings. Rates on the U.S. 10-year Treasury bond have recently moved from 1.6 percent to 2.6 percent – in the face of continued Federal Reserve buying of $85 billion per month.

The dream that the government could provide prosperity to the residents of Detroit has come to its inevitable end. The dream that the federal government can provide prosperity to the entire country is even more delusional. And it will come to a far worse end.

Printing trillions in new dollar bills to facilitate the madness won’t prevent the inevitable bankruptcy of our country. It will merely gut the middle class of its savings and its wages first.

Believe me, this will come to pass. It will not take another 50 years. Maybe 10.

]]>http://www.wnd.com/2013/08/dederal-government-twice-as-bankrupt-as-detroit/feed/0Living well at the end of Americahttp://www.wnd.com/2013/07/living-well-at-the-end-of-america/
http://www.wnd.com/2013/07/living-well-at-the-end-of-america/#respondSat, 06 Jul 2013 00:43:23 +0000http://wp.wnd.com/?p=473251I’ve spent much of the last several years warning people about the “End of America”…

I’ve shown my readers what is about to happen and tried to convince them to take precautions before it’s too late.

But let’s face it … my work is mostly for wealthy people who mainly want to continue to be wealthy. So I’ve focused on how to prepare for these changes from the perspective of an investor – someone whose primary goal is to earn a return on his capital. I had precious little to offer regular wage-earners.

But the real danger right now is mostly to the middle class in America.

Americans owe more money, collectively, than ever before in our history – far, far, far more.

We owe at every level: $17 trillion at the federal level, $13 trillion in mortgages, another trillion in student loans, and nearly $3 trillion in state and local government debt. Put all of these numbers together and you end up with a $60 trillion pile of obligations. That’s nearly four years’ worth of our entire country’s total production.

To make sense of the numbers, just take a bunch of the zeroes away. Put these facts into a storyline that’s become all too common in America. Our economy is like a tattooed thug living in Detroit. In between burning broken-down cars and selling crack, he makes $16,000 a year working “security” at a local nightclub. Outside of busting heads, he has no real skills.

And why would he want to work hard to acquire them? Thanks to his public school education, he is convinced other people have a moral obligation to provide for him… especially rich people. They will give him health care, a clean apartment, a phone, etc. In his worldview, that’s what’s fair.

And if they won’t? He’s got no qualms about firing first and taking what he needs. After all, they owe him. For now though, he’s doing great.

The Korean grocer up the street gave him a credit account. In only a few short years, he’s run up a $60,000 tab. What are the chances he’s going to drastically cut his expenses, work hard to get a promotion, and find a way to repay these debts? Zero. What are the chances he ends up knocking over the Korean grocer and teaching him something about life in America?

You may object to my metaphor. But believe me, it’s far more accurate than most people are comfortable talking about. We live in a country that’s coming apart at the seams – financially, culturally, morally, and spiritually. The reason is simple. We have collectively become addicted to living way, way beyond our means.

My favorite example about how absurd our debts have become? The state of New Jersey still owes $110 million for a football stadium (Giants Stadium) that was demolished in 2010. It won’t retire this debt until 2025.

Similar debts exist on defunct or torn-down stadiums in Houston, Kansas City, Memphis, Seattle, and Pittsburgh. These stadiums are physical reminders of the absurd promises the government has made to its citizens.

On top of the debt it now owes, our federal government has promised its citizens $124 trillion of additional benefits. That’s not only more money than we could ever finance with tax revenues, but it’s considerably more money than all of the privately owned assets in the United States (roughly $99 trillion).

Keeping this lie alive… the lie that we can afford our debts (or even our defunct stadiums)… has become the most important national goal. That’s why everything stops when Federal Reserve Chairman Ben Bernanke speaks. Our obsession with Fed policy statements is the best proof I have that we’re far more concerned with maintaining “The Great Lie” than we are at actually building a better real economy.

Have you ever told a big lie? Did you ever exaggerate something to hide a weakness or insecurity? Or maybe you lied to cover a big mistake you’d made. Did you get away with it? Or did maintaining the lie suddenly consume all of your attention and energy?

Seemingly forgotten in our obsession to maintain the fiction of our solvency are the huge costs of lying, running our country on Asian loans, and keeping the printing press churning. Nobody notices that the purchasing power of the dollar is down by almost 50 percent in the last 10 years… or that real wages have been falling since the early 1970s… or that almost half of the able-bodied men in our country no longer work. Nobody mentions that most of the students at most of the urban schools in our country either don’t graduate or can’t achieve test scores above minimum standards. Sooner or later, the consequences of our lies will fall upon us.

Your taxes are going up. The number of people you will be forced to support (those on disability, food stamps, or Medicare… retirees… people living in war-torn countries…) is soaring. And your ability to pay for these benefits is being destroyed by global competition and the decline of the dollar. America is promising everyone more. And you’re the person who will have to pay.

Make no mistake… Every time the president says only “the rich” will pay taxes, just imagine he’s saying “you.” That’s far closer to the truth.

So… what can you do if you’re already struggling to maintain your standard of living? How can you hope to maintain your lifestyle as your wages collapse and the rate of economic growth slows or even reverses?

I believe your best alternative is to find a way to build your own business. Nothing good is going to happen for you in your life unless you make it happen. This is a harsh but important reality.

As an entrepreneur, I’ve gotten used to this fact. But for most people, it is an impossible hurdle. Most people can contrive an infinite number of reasons why they can’t do something for themselves. I used to think it was impossible to coach people past this inertia. But…

I’m reading a book that has changed my mind. It’s called “Choose Yourself,” by James Altucher. I believe this book will become a true classic. Anyone who reads it and follows its advice will become vastly more successful. It is, without a doubt, the best book I’ve ever read on how to build a new business.

I’m using it as my guidebook. The book covers the basics – including how to brainstorm for new business ideas, how to partner, and how to sell your business. It includes contrarian ideas that I know from experience are real secrets to success – like why you should never negotiate.

But the best part of the book – and the part I’m sure you won’t find anywhere else – is James’ ideas about how to manage your health and spirit while you’re going through the rigors of entrepreneurship. I can tell you that I discovered the same valuable keys – how important it is to exercise, sleep, and be grateful. And I can tell you that when my life gets out of whack, I return to the same kind of daily practice James describes.

Even if you never start your own business, I believe this book can serve as a guide to maintaining your happiness in the face of what’s likely to become a tough economy. It might sound strange to say this, but I wish I’d written the book. I think it will be as useful over the next few years as what I publish. James can teach you how to handle pressure, stress, failure, and success. Without these skills, all of the best financial advice in the world won’t make much of a difference.

]]>http://www.wnd.com/2013/07/living-well-at-the-end-of-america/feed/0Junk bonds will crashhttp://www.wnd.com/2013/06/junk-bonds-will-crash/
http://www.wnd.com/2013/06/junk-bonds-will-crash/#respondThu, 27 Jun 2013 04:19:00 +0000http://wp.wnd.com/?p=464707We didn’t mean to call the top. But it sure looks like we did.

On May 10, I issued this warning to my readers: “The U.S. bond market – particularly junk bonds – is going to crash. When this crash occurs, it will be the largest destruction of wealth in history.”

As I explained then, I believe we’ll see a real panic in the corporate bond market at some point in the next year. I expect the average price of non-investment-grade debt (aka junk bonds) to fall 50 percent. Investment-grade bonds will fall substantially, too. (I’d estimate somewhere around 25 percent.)

This is going to wipe out a huge amount of capital, and believe me, it’s 100 percent guaranteed to happen. It’s already starting.

On May 7, the yield on the Barclays U.S. Corporate High Yield Index fell to a record low of 4.97 percent. It was the first day in the history of the U.S. junk bond market (where less creditworthy companies borrow) that the index yield fell to less than 5 percent.

The next day, yields fell again to 4.96 percent.

Watching the action that week, we simply couldn’t believe our eyes. General Motors issued new debt paying a yield of only 3.75 percent. General Motors is sitting on roughly $100 billion in pension obligations. It went bankrupt less than five years ago. And it operates in a sector that’s still suffering from massive overcapacity. To say GM’s five-year note isn’t investment-grade could be the punch line of a joke.

At yet, there it was. You should imagine us sitting at our desk, rubbing our eyes in disbelief.

It is impossible to justify the high price of junk bonds (and their correspondingly low yields).

You must remember that the default rate on these bonds will soar, sooner or later.

In March 2009, the default rate on this category of debt hit 14.9 percent. And of course, default rates rise when more bonds are issued. Issuance hit an all-time record in 2012. Through the beginning of May, the high-yield sector was on pace to beat that record this year.

In other words, never before in modern American finance have so many investors placed so much capital in riskier assets with less compensation. It is a sure bet – a 100 percent guaranteed lock – these investments will end badly.

Believe it or not, that’s not even the worst sign that the debt market is headed for an enormous crash.

Not only are investors no longer being compensated adequately for the risk of default, issuers of these debts have also succeeded in placing clauses in the contracts that allow them to repay investors with additional debt securities rather than cash.

So-called pay-in-kind (PIK) toggle notes allow corporate borrowers the option of issuing still more debt rather than paying bondholders interest in cash. These kinds of terms were invented during the last credit bubble, at the height of the market in 2006 and 2007.

Needless to say, a borrower who requires the option to repay you with still more debt isn’t likely to repay you. These investments are sure to end badly, too.

The default rate on high-yield paper hit what appears to be a low in April at 3 percent. The default rate has now begun to tick up, inching to 3.1 percent in May. This will surely increase. The cycle will turn (as it always does). Higher rates will come. Refinancing terms will be tougher and tougher. Defaults will soar. This is certain.

And so, in the May 10 edition of our e-letter, the S&A Digest, we issued our warning:

The coming collapse in the bond market will be far worse than it was last time, too. This time, the Federal Reserve’s actions have driven forward the huge bull market in bonds. The Fed is printing up almost $100 billion per month and buying bonds. That has forced the other buyers of bonds to buy riskier debt that, historically, offered much higher yields.

Today, those yields have been incredibly ‘compressed.’ You can imagine the high-yield segment of the bond market to be like a spring whose coils have been driven together by the force of the Federal Reserve’s market manipulation. As soon as the Fed’s buying stops (and it must stop one day, or else it will trigger hyperinflation), the yields on those riskier bonds will soar again.

As bond yields rise, the price of bonds will fall sharply.

We were right. Since early May, the iShares High-Yield Bond Fund (HYG) has given up all the capital gains it made in the previous seven months. And on June 6, market research firm Lipper released data showing a record volume of investor redemption from mutual funds and exchange-traded funds holding high-yield bonds. Investors pulled $4.6 billion out of the high-yield market.

The idea was that our ability to discover and produce higher amounts of hydrocarbon-based energy had peaked and would be forever in decline. This “inevitable” decline in energy production would, in turn, destroy the modern world, as all the luxuries and technologies that we enjoy today (such as cheap electricity and automobiles) rely on these fuels.

I believe historians will look back and marvel over how we could imagine the world would run out of oil – and the incredible mania that thinking produced in the oil markets in the mid-2000s.

As I’ve said before, having a correct understanding of these issues is critical, perhaps the single most important economic issue of the next several decades.

Peak Oil was a terrific lie because it enriched so many powerful constituencies.

Oil and gas promoters used the theory to scare the public into investing huge amounts of capital into oil and gas exploration. Globally, the oil and gas industry’s annual capital investment budget soared, from a little more than $100 billion in 1999 to an all-time record $1 trillion in 2012.

The promoters’ pitch was intoxicating. Their siren song was the idea of the last barrel of oil in the world. What would it be worth? After all, if supplies could never be increased, then the price of oil and gas would soon reach unimagined heights. All this speculation drove oil prices to more than $150 per barrel in the summer of 2008.

Peak Oil was such a simple lie, even politicians could understand it. It was perfect for them because Peak Oil was a problem with no possible solution. When something can’t be fixed, politicians claim all sorts of powers to regulate the issue. That’s when the real trouble started.

The idea that we were going to quickly run out of oil played into the same guilty narrative that many politicians were telling about global warming. Not only were hydrocarbons bad for the environment, consuming them was tantamount to impoverishing our children and dooming them to a future without affordable transportation and electricity.

These ideas were used as cudgels by politicians to discredit the oil and gas industry. They justified all kinds of massive and stupid government-led investments into supposed alternatives.

None of these alternatives had the capacity to replace our country’s massive energy infrastructure (which is based almost completely on hydrocarbons). But that wasn’t really the point. These huge public-sector investments mostly served to enrich politicians (like Al Gore) and their lobbyists and backers.

We estimate that to date, the government has spent, wasted or simply lost roughly $500 billion on absurd energy investments. That’s roughly twice as much as it lost on the housing bubble.

This has fueled a huge binge of crony capitalism. Just look at solar-energy company Solyndra. Here the government lost half a billion dollars on one company. No one has gone to jail. No one has been kicked out of office. That’s because the politicians weren’t lining the pockets of their supporters, right? No, they were nobly trying to “solve” global warming – and forestall Peak Oil.

Sure.

The irony is, long before the shale oil and gas boom started, we had more than enough evidence to completely discredit Peak Oil.

The theory’s main flaw is that it assumes our knowledge of oil and gas reserves is complete. But the truth is plainly the opposite. For example, the U.S. Geological Survey estimated in 1994 that the recoverable amount of oil and gas in the North Dakota’s Bakken shale formation totaled 151 million barrels.

Today, about 15 years later, producers in the Bakken are extracting 255 million barrels each year – about 100 million more barrels annually than were supposedly to be in the entire basin.

Harold Hamm, CEO of the largest Bakken producer, Continental Resources, says the Bakken has at least 24 billion barrels of recoverable oil. His firm is currently producing more than 40 million barrels per year. If Hamm is right, the Bakken could be four times larger than the biggest oilfield ever discovered in the continental U.S. – H.L. Hunt’s giant elephant field, known as East Texas.

Peak Oil’s second main flaw is that it assumed recovery methods would forever be limited to extracting about 10 percent of the oil contained in a conventional reservoir. But as technology improves, most knowledgeable industry experts predict that ultimate recovery rates will exceed 40 percent. So even if we never discovered any additional oil reservoirs, we might still only be halfway toward Peak Oil.

Consider Denbury Resources, one of the best companies in the world at “renovating” existing oilfields by using new, advanced recovery methods. Denbury can take an old conventional oilfield and increase the average recovery rate from 10 percent to 25 percent.

Applying new technologies to existing oil reservoirs is a very good business, by the way. Denbury’s shares have soared from around $0.50 in the late 1990s to more than $40 at the peak of oil prices in the summer of 2008. Clearly, if Peak Oil was real, Denbury’s entire business model wouldn’t have worked. Not only did it work, it worked incredibly well because Denbury’s strategy eliminated the main capital risk of oil production – dry holes.

Here’s the fascinating thing: Enhanced production techniques were pioneered by the firm Kinder Morgan in the 1990s and then copied by dozens of companies like Apache and Denbury in the late 1990s and early 2000s. The actual results of these businesses made it clear that the assumptions of Peak Oil were simply wrong.

They weren’t sometimes wrong. They were always wrong. They weren’t merely wrong in theory. They were completely wrong in practice.

Regardless, the widespread belief in Peak Oil caused billions of dollars to flow toward oil and gas exploration and production companies. These companies, in turn, have used that capital to find and produce vastly more oil and gas than almost anyone thought was possible. That’s how the free market works: Demand drives savings and investment, which increases supply … until prices fall.

Since hitting a bottom in mid-2005, total annual energy production in the U.S. has grown 10 percent, from 62.6 trillion cubic feet equivalent (tcfe) to more than 69 tcfe.

But this doesn’t tell the whole story.

Total energy production in the U.S. includes coal and petroleum from the North Slope of Alaska. When you look at only the lower 48 states and take out coal, you see the real trend.

Oil production in the lower 48 states is up a stunning 75 percent and dry gas production is up 35 percent over the past eight years.

These increases are on a scale we haven’t seen in more than 50 years. They are huge increases in production that most people believed could never happen again.

]]>http://www.wnd.com/2013/06/the-mega-lie-underlying-our-energy-problems/feed/0The single greatest threat to your wealthhttp://www.wnd.com/2013/05/the-single-greatest-threat-to-your-wealth/
http://www.wnd.com/2013/05/the-single-greatest-threat-to-your-wealth/#respondFri, 24 May 2013 01:21:21 +0000http://wp.wnd.com/?p=440625As you undoubtedly know, financial newsletter writers get paid to make bold, exciting predictions. Judging by the hyperbole in our industry’s sales letters, you’d have to imagine that we’re all bipolar.

After all, according to newsletter writers, the world is always either about to end – or about to boom.

Today’s essay is no different. In fact, what I would like to show you today is without a doubt the single greatest threat to your wealth you will ever face. Even so, I’m confident almost all of you will ignore this warning until it is far, far too late. And that’s at least partly my fault.

So before we get to the finance, I’d like to share something about my own company that I don’t like and wish I could change.

The reality is, the terrible things and incredible booms we predict (almost every day) in the sales presentations for our newsletter business rarely come to pass.

I’d like to think our sales presentations are better than my fellow publishers, but truthfully, I’m pretty sure an outsider wouldn’t be able to tell the difference. So how can you tell when a newsletter writer’s dire warnings or emphatic recommendations are real – or at least likely to turn out to be right?

As you would imagine, I have some insight into this question. After all, I have written some of the most famously hyperbolic headlines of all time in our industry. Some of these predictions turned out to be right, like when I predicted Fannie Mae and Freddie Mac were going to zero.

New subscribers might rightfully wonder why a newsletter publisher (like me) would write such things about his own work and draw attention to the occasional excesses in his company’s marketing. Why would I remind our clients of the single biggest weakness of our business model – our need for hyperbolic sales pitches?

What can I say? I can’t help myself. I feel an obligation to tell you what I’d like you to tell me if our roles were reversed. That’s why I write these essays. I firmly believe that if you combine the strategies I explain in these notes with our investment research, you will excel as an investor. And then you’ll forgive us for the hyperbole required for our marketing.

In fact, I know thousands and thousands of investors around the world have used our work to become world-class investors. They depend on us for reliable and profitable ideas. When I meet them, they always ask, “Why do you people use such terrible marketing?”

Well, we use what works. We assume, were you in our shoes, you’d do the same.

Sadly, though, perhaps because of our marketing, most of the people who try one of our investment newsletters either demand a refund or simply allow their subscription to lapse. The main reason that happens is because the reason they subscribed – the original hyperbolic headline – did not pan out the way they expected. (Or at least it didn’t pan out soon enough to suit their desires for the end of the world or the beginning of a new boom.)

Even worse: When the facts change, we’re likely to change our minds. But nothing costs you more in publishing. That’s a fact. I can’t explain it, but it is the truth.

Likewise, nobody wants to read that their cherished financial nonsense is going to come to a bad end. I can’t count the number of Peak Oil believers who’ve sent me angry demands for a refund – never mind the soaring oil and gas production numbers. Or the latest craze: digital currency Bitcoin. Just mentioning that Bitcoin might turn out badly will likely cost me several thousand subscribers. I’m not kidding.

So how can you know when a newsletter writer is going to be right about an outlandish prediction, perhaps one that goes against your own beliefs about the market?

In my opinion, the best guide is history. When history says the prices in a market have gotten completely out of whack, the newsletter writer is going to be right every time.

If history isn’t your bag, you can look at the data and the trends and remember your statistics lessons: the central tendency is reversion to the mean.

Let me give you one recent example:

About a year ago, I made an “outlandish” prediction – that natural gas prices were going to go up and oil prices were going to come down:

There are few things in life I know with certainty, but I know this: Barring the end of the world, the price of oil is going to fall and the price of natural gas is going to rise.

At the time, natural gas producer Chesapeake was collapsing because of low natural gas prices and nearly everyone on Wall Street was short natural gas. I recommended buying Chesapeake bonds and its competitor, Devon, and I predicted a huge rebound in natural gas prices.

In fact, I guaranteed that natural gas would soar because I knew it was certain – a 100 percent chance – that natural gas couldn’t continue to trade for less than $2 per thousand cubic feet. A year later, the price of gas has doubled. How did I know?

A barrel of oil contains 5.825 million British thermal units (Btu) of energy. One thousand cubic feet of gas contains just a little more than 1 million Btu. Thus, a barrel of oil has approximately six times more energy than 1 million cubic feet of gas. On an energy-equivalent basis, you would expect natural gas to trade for one-sixth the price of oil. But of course, oil is more highly prized as a fuel source. It’s more easily portable and thus is a better fuel for transportation.

Historically, looking at the two commodities, the average multiple of gas to oil was about 10x. That is, a barrel of oil was, on average, 10 times more expensive than one thousand cubic feet of gas. By April 2012, that premium had reached an all-time high of 55 times.

There was no way that kind of price relationship could have lasted. A reversion to the mean was 100 percent certain. And that’s what happened. Today, with West Texas Intermediate crude oil at $95 per barrel and natural gas at around $4, the ratio is still wide, at almost 24 times. But it’s half as wide as last year. You should expect oil prices to continue to decline and gas prices to continue to rise. I believe the future 10x equilibrium will be reached when gas is around $6 and oil is around $60.

When this crash occurs, it will be the largest destruction of wealth in history. There has never been a bigger bubble in U.S. bonds.

How do I know? It’s simple. Junk bonds (aka high-yield bonds issued by less creditworthy companies) have never yielded less than 5 percent annually. But they do today. Likewise, the difference between the yields on junk bonds and the yields on investment-grade bonds has almost never been smaller. That means credit is more available today than almost ever before for small, less-than-investment-grade firms.

The last time credit was this widely available – and at such low costs – was in 2007. And you know how that turned out.

The coming collapse in the bond market will be far worse than it was last time, too. This time, the Federal Reserve’s actions have driven forward the huge bull market in bonds. The Fed is printing up almost $100 billion per month and buying bonds. That has forced the other buyers of bonds to buy riskier debt that, historically, offered much higher yields.

Today, those yields have been incredibly “compressed.” You can imagine the high-yield segment of the bond market to be like a spring whose coils have been driven together by the force of the Federal Reserve’s market manipulation. As soon as the Fed’s buying stops (and it must stop one day, or else it will trigger hyperinflation), the yields on those riskier bonds will soar again. As bond yields rise, the price of bonds will fall sharply.

To give you a specific example, car manufacturer General Motors recently issued bonds to investors. The yield on these securities was only 3.25 percent. I’m fairly certain that inflation in our economy will exceed that rate.

That’s why a company that went bankrupt in the last five years, and which operates in a highly competitive market and still suffers from massive overcapacity, is paying essentially nothing for capital.

That doesn’t make any sense.

Investors are being paid nothing, in real terms, for their savings – or to accept the real risk that GM could default. Investors ought to be getting at least 7.5 percent on these bonds, a yield that would cause the price of these bonds to fall 50 percent.

I believe we’ll see a real panic in the corporate bond market at some point in the next year. I expect the average price of non-investment-grade debt (aka junk bonds) to fall 50 percent.